Value Added Tax (VAT) is a tax on consumption levied in the United Kingdom by the national government. It was introduced in 1973 and is the third largest source of government revenue after income tax and National Insurance. It is administered and collected by HM Revenue and Customs.

VAT is levied on most goods and services provided by registered businesses in the UK and some goods and services imported from outside the European Union. There are complex regulations for goods and services imported from within the EU. The default VAT rate is the standard rate, 20% since 4 January 2011. Some goods and services are subject to VAT at a reduced rate of 5% (such as domestic fuel) or 0% (such as most food and children’s clothing). Others are exempt from VAT or outside the system altogether. Under EU law, the standard rate of VAT in any EU state cannot be lower than 15%. Each state may have up to two reduced rates of at least 5% for restricted list of goods
and services. The European Council must approve any temporary reduction of VAT in the public interest. VAT is an indirect tax because the tax is paid to the government by the seller (the business) rather than the person who ultimately bears the economic burden of the tax (the consumer). It is also a regressive tax: the poorest people spend a higher proportion of their disposable income on VAT than the richest people.

History Prior to 1973:

The UK had a consumption tax called “Purchase Tax” which was levied at different rates depending on the goods’ luxuriousness. On 1 January 1973 the UK joined the European Economic Community and as a consequence “Purchase Tax” was replaced by “Value Added Tax” on 1 April 1973. The then Conservative Chancellor Lord Barber set a single VAT rate (10%) on most goods and services. In July 1974, Labour Chancellor Denis Healey
reduced the standard rate of VAT from 10% to 8% but introduced a new higher rate of 12.5% for petrol and some luxury goods. In November 1974 Healey doubled the higher rate of VAT to 25%. Healey reduced the higher rate back to 12.5% in April 1976. Conservative Chancellor Geoffrey Howe increased the standard rate of VAT from 8% to 15% and abolished the higher rate in June 1979. The rate remained unchanged until 1991, when Conservative Chancellor Norman Lamont increased it from 15% to 17.5%. The additional revenue was used to pay for a reduction in the hugely unpopular community charge. During the 1992 general election the Conservatives promised not to extend the scope of VAT, but, in March 1993, Lamont announced that domestic fuel and power, which had previously been zero-rated, would have VAT levied at 8% from April 1994 and the full 17.5% from April 1995. The planned introduction of VAT on domestic fuel
and power went ahead in April 1994, but the
increase from 8% to 17.5% in April 1995 was
scuppered in December 1994, after the
government lost the vote in parliament.
In its 1997 general election manifesto, the Labour Party pledged to reduce VAT on
domestic fuel and power to 5%. After gaining power, the new Labour Chancellor
Gordon Brown announced in June 1997 that the lower rate of VAT on domestic fuel and
power would be reduced from 8% to 5% with effect from 1 September 1997. In November 1997, Brown announced that the VAT on installation of energy saving materials would be reduced from 17.5% to 8% from 1 July 1998. Brown subsequently reduced VAT
from 17.5% to 8% on sanitary protection products (from 1 January 2001); children’s
car seats (from 1 April 2001); conversion and renovation of certain residential properties (from 12 May 2001);
contraceptives (from 1 July 2006); and smoking cessation products (from 1 July
2007)

In response to the late-2000s recession, Labour Chancellor Alistair Darling announced in November 2008 that the standard rate of VAT would be reduced from 17.5% to 15% with effect from 1 December 2008. In December 2009, Darling announced that the standard rate of VAT would return to 17.5% with effect from 1 January 2010. In the run up to the 2010 general election there were reports that the Conservatives would raise VAT if they gained power. The party denied the reports. Following the election in May 2010, the Conservatives formed a coalition government with the Liberal Democrats and in June 2010 Conservative Chancellor George Osborne announced that the standard rate of VAT would increase from 17.5% to 20% with effect from 4 January 2011.

Operation:
All businesses that provide “taxable” goods and services and whose taxable turnover exceeds the threshold must register for VAT. The threshold has been £77,000 since April 2012. It is by far the highest VAT registration threshold in the world. Businesses may choose to register even if their turnover is less than that amount. All registered businesses must charge VAT on the full sale price of the goods or services that they provide unless exempted or outside the VAT system. The default VAT rate is the standard rate, currently 20%. Some goods and services are charged lower rates
(reduced or zero). Registered businesses must pay over to HMRC the VAT they have charged on their goods or service (known as output tax) but they may offset this with the VAT they have incurred on goods or services they have purchased (known as input tax).

A separate scheme, called The Flat Rate Scheme is also run by HMRC. This scheme allows a VAT registered business with a turnover of less than £150,000 per annum to pay a fixed percentage of its turnover to HMRC every 3 months. The scheme is designed to reduce red tape for small business and allow new companies to keep some of the VAT they charge to their customers.

Businesses that sell exempt goods or supplies, such as banks, may not register for VAT or reclaim VAT that they have incurred on purchases. Businesses that sell some exempt goods or supplies may not be able to reclaim the VAT on all of their purchases. However, businesses that sell zero-rated goods or supplies, such as food producers or bookseller, may reclaim all the VAT they have incurred on purchases.

The UK government loses billions in revenue each year due to VAT avoidance, evasion and fraud. In 2006 the loss was estimated to be between £13bn and £18bn, equivalent to £1 for every £6 of VAT due. The bulk of the lost revenue, about £1 in every £8 of VAT due, is due to evasion.[29] Evasion, which is illegal, occurs when registered businesses pay over to HMRC less than they should. This can be done by understating sales or overstating purchases. Evasion also occurs when businesses do not charge VAT on goods and services they provide even though they are legally obliged to. Cash-in-hand jobs by tradesmen may indicate VAT evasion.

In recent years carousel fraud (also known as missing trader fraud) has increased. Criminal gangs trade goods, such as mobile phones, across EU countries. They do not have to pay VAT, as imports from the EU are exempt. The fraud occurs when the criminals sell the goods with VAT in the UK but fail to pass the VAT to HMRC. The goods are often repeatedly shipped round EU countries by criminal gang networks, hence the “carousel” name. According to the HMRC, between £1.1bn and £1.9bn tax revenue was lost in 2004/05 due to carousel fraud.

The European Union Emission Trading Scheme has been plagued by carousel fraud. A loophole in VAT law – the Low Value Consignment Relief (LVCR) – means that goods imported from outside the EU and costing less than a set amount are not subject to VAT. When the LVCR was introduced in 1983 it was set at about £5 but gradually rose to £18. In March 2011 the government announced that the LVCR would reduce from £18 to £15 from 1November 2011.The LVCR has allowed online retailers of DVDs and CDs to avoid VAT by importing the goods from the Channel Islands, which are not part of the EU.
Major retailers involved in this tax avoidance include Amazon, Asda, HMV, Play.com, Tesco, W H Smith and Woolworths. The tax avoided each year due to LVCR was estimated to be £85m in 2005, £110m in 2008, £130m in 2010 and£140m in 2011.
The government has announced plans to close the loophole

Criticism:

Opponents of VAT claim VAT is regressive and is paid by all consumers whether they be rich or poor, young or old The poorest also spend a higher proportion of their disposable income on VAT than richest.

An Office for National Statistics report showed that in 2009/10 the poorest 20% spent 8.7% of their gross income on VAT whereas the richest 20% spent only 4.0% of their gross income on VAT. Similarly, the poorest 20% spent 9.7% of their disposable income on VAT whereas the richest 20% spent only 5.2% of their disposable income on VAT. Supporters of VAT claim VAT is progressive as consumers who spend more pay more VAT. The zero rating of food and allowing businesses to reclaim input VAT means that the government in effect subsidises the food industry. Critics also argue that VAT is double taxation as consumers pay for goods and services using income that has already
been taxed. It is also argued that VAT is an inefficient tax due to the numerous
exemptions and concessions.
It could also be argued that, compared to its predecessor Purchase Tax, VAT has encouraged the “throwaway society”.Purchase Tax imposed high rates on
new goods (especially luxury goods) but did not apply to repair services.VAT has
increased the cost of repairs and encouraged consumers to replace goods rather than
have them repaired.VAT also covers second- hand goods (which Purchase Tax did not)
and has discouraged the re-use of goods through the second-hand market

A £38bn development boom in London’s most expensive neighbourhoods has been spurred by rampant demand from European and Asian buyers seeking safe investments away from turbulent Eurozone economies.

The pipeline of upmarket housing projects in planning or already under construction in the UK capital has increased more than two-thirds during the past year, with 15,500 units slated for delivery by 2021, even as building work in other parts of the country remains stagnant.

That’s one version of the story. The Guardian offers another (in a compelling story that deserves to be read in full). They report:

Britain has allowed key members of Egypt’s toppled dictatorship to retain millions of pounds of suspected property and business assets in the UK, potentially violating a globally-agreed set of sanctions.

The situation has led to accusations that ministers are more interested in preserving the City of London’s cosy relationship with the Arab financial sector than in securing justice.

I and the Tax Justice Network have long argued there is an economy within an economy n the UK – which is that of tax haven UK. Boith these reports are clear signs of this.

Of course money floods to the UK – but that is because our domicile rule makes the UK a perfect tax haven. But these people who come do not add value: they simply distort our housing markets, destroy the balance in our society, encourage more financial services which imbalance our economy and have no role to play in our democratic and other processes. It’s worse than that though: as the second report shows, far too much of this money is illicit and the UK has a willingness to turn a blind eye to such funding that is reflected in the behaviour of our banks who all to knowingly it seems do just the same thing.

This is tax haven UK at work, like a cancer within our country, destroying it from within

While the World Economic Forum has taken up pages of the world’s leading business press another far less reported conference took place in San Antonio, Texas. Hosted by the American Bar Association, the conference laid out the plans of the US Department of Justice (DOJ) and US Internal Revenue Service (IRS) in their ongoing battle against privacy and competitive taxation.

The consensus is truly worrying: the UBS and Swiss Financial Markets Association’s divulging of private client information to the USA (which has since been ruled illegal by the Swiss courts and about which I have written here before), Tax Information Exchange Agreements, blacklists and economic blackmail are all just the start of this concerted effort to stop individuals benefiting from employing competitive jurisdictions for business and investment.

Some items of note were the new “Joint International Tax Shelter Information Centre”.

Tax departments from Australia, Canada, Japan and the UK are ganging up with the US IRS to conduct what the IRS calls “holistic taxpayer analysis“. This rather flowery name hides what can only be described as multi-lateral state sponsored invasion of privacy and entails a thorough scrutinizing of all personal and business holdings and interests of the individual in each and every jurisdiction simultaneously. This coincides with the opening of 11 new international IRS offices around the world, with Switzerland and Panama already earmarked as 2 countries to get their very own branch of the US tax office!

The UBS saga began primarily with a tip off from a disgruntled former UBS employer, Bradley Birkenfeld. I imagine the proximity of these new IRS offices is to encourage just that sort of behaviour. Some food for thought, however, for anyone who feels they would like to pop in and have a chat with their new local IRS branch: Birkenfeld has been sentenced last month to over 3 years imprisonment for his help.

I have written before that a swiss banker that I know, no longer takes US citizens as clients as it is too much effort. Well, new legislation which is being enacted currently by the US government with the wonderful acronym of FATCAT, seems designed to spread this sentiment by making it totally cost prohibitive for almost all foreign banks to hold US owned accounts, Though the Foreign Account Tax Compliance Reporting Act (FATCAT) which should enter in to US law in the next few weeks, may also have the unwanted effect of stopping or curtailing foreign investment in to the US markets as compliance cost rise for international brokers and investment groups, One could argue this could be counter productive however much extra tax revenue is raised, as the US economy struggles out of recession and the Dollar remains weak, is a further drop in demand for the currency, US stocks or treasury products what is wanted or needed by the US taxpayer, sovereign wealth funds or international investors alike??

John Fry.

John is the Business Development Director of Formcos-Russia a unique trust company offering trust and tax planning services internationally from Moscow.

So the USA gave 40 months of prison time to the guy who gave up UBS… he was partly responsible for 12 convictions (so far) and payments of over 800 million dollars in fines, taxes and interest – he will sleep well in his cell knowing he did the right thing.

Bloomberg had a roll call of the convicted and their sentences, several of the non US citizens have been “declared fugitive”. I will add a link at the bottom of the post.

A Swiss court has now ruled that the handing over of confidential UBS bank details to United States investigators by the Swiss authorities last year was illegal and against the Swiss Constitution. The federal court said the Swiss Financial and Market Supervisory Authority (Finma) abused its power when it ordered that details of 285 account holders suspected of tax evasion in the US be sent to Washington.
Though this won’t help the convicted or the hundreds of others not convicted, who after all paid good money for the privacy and expertise of UBS, it will potentially now lead to a myriad of claims against them.
Carlo Lombardini, expert on banking law in Geneva, came out in favour of the court ruling because it helped to reassure clients. “It proves that the justice system in Switzerland works” he said, well, if that is how it works I leave it up to you to decide whether you need that service.

Saga in Brief:
A Swiss bank that makes more money in the USA than at home is threatened with the loss of its US banking licence.
A weak government who didn’t want to lose face with Obama’s USA batted the decision around until it fell to someone deniable who gave in to the IRS.

4,750 US citizen’s details so far given up to the US authorities.

Swiss Privacy?

The economy of Switzerland is one that relies on the prestige and privacy of their financial institutions. A Swiss banker friend said that the Swiss in general, not just the banks want the whole thing to die away, his bank are not taking on any new US clients and are keen to move the existing clients into trust structures which offer better protection and privacy.

Besides as my Swiss friend says there is now far more potential in offering his services to the Russians, Indians and Chinese!